What Is Chapter 7?
Bankruptcy is a serious business, so you need to understand it clearly. Chapter 7 of Title 11 in the U.S. bankruptcy code regulates the process of asset liquidation. A bankruptcy trustee is designated to liquidate nonexempt assets to pay creditors; after the proceeds are worn out, the remaining debt is absolved. There are qualification requirements to file Chapter 7, such as the debtor has to have had no Chapter 7 bankruptcy discharged in the preceding eight years and the applicant must pass a means test. This process is also called "straight" or "liquidation" bankruptcy.
Understanding Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the absolute priority rule designates the order in which debts are to be paid. Under this rule unsecured debt is separated into classes or categories, with each class receiving priority for payment. Secured debt is debt backed or secured by collateral to lower the risk associated with lending, such as a mortgage.
Unsecured priority debts are paid first. Examples of unsecured priority debts are tax debts, child support, and personal injury claims against the borrower. Secured debts are paid after. Last is the payment of nonpriority, unsecured debt with funds remaining from the liquidation of assets. If there are not adequate funds to pay the nonpriority unsecured debt, then the debts are paid on a pro-rata basis.